G.R. No.

L-26743             October 19, 1927

THE BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
FIDELITY & SURETY COMPANY OF THE PHIL., defendant-appellant.
Ross, Lawrence and Selph for appellant.
Araneta and Zaragoza for appellee.
 
MALCOLM, J.:
          The purpose of this action is through the reformation of a written instrument of guaranty upon
the ground of mistake — the alleged mistake consisting of the substitution of the words "Laguna
Coconut Oil Co." for "Bank of the Philippine Islands" — to obtain for the Bank of the Philippine
Islands a judgment for P55,000, with interest, against the Fidelity and Surety Company of the
Philippine Islands. The case is an old friend of the courts which has been with us twice before, and
which, are ungracious enough in our welcome to hope, has been seen by the court for the last time.
STATEMENT OF THE CASE
          The original action was commenced by the Bank of the Philippine Islands against the Laguna
Coconut Oil Co. and the Fidelity and Surety Company of the Philippine Islands on August 25, 1922.
The Fidelity and Surety Company interposed a demurrer to the plaintiff's complaint which was
sustained by the trial court. The plaintiff thereupon filed an amended complaint. The Fidelity and
Surety Company again demurred to the amended complaint, and again it was sustained. Plaintiff
appealed to the Supreme Court where the ruling was reversed and the case remanded for further
proceedings (44 Phil., 618). Thus ended the preliminary skirmish.
          On the return of the record to the lower court, the Fidelity and Surety Company filed an answer.
The Laguna Coconut Oil Co. made no defense, and judgment by default was obtained against it. The
case was submitted to the court upon a stipulation of facts. Upon the pleadings and the agreed facts, the
trial court rendered judgment against the Fidelity and Surety Company of the Philippine Islands for the
full amount of the note, with interest. From this judgment, the Fidelity and Surety Company appealed
to be well taken, for the principal reason that the action involved a reformation of the contract of
guaranty, which was not put in issue by the pleadings. Accordingly, the judgment was reversed and the
action dismissed, "without prejudice to the bringing of another action upon the same cause." (48 Phil.,
5.) Thus ended a major engagement between the parties.
          On October 20, 1925, the Bank of Philippine Islands commenced a new action against the
defendant, the Fidelity and Surety Company of the Philippine Islands, in the Court of First Instance of
Manila. The defendant demurred. The trial court overruled the demurrer, and the defendant answered.
Evidence was produced on behalf of the plaintiff. The judgment was in favor of the plaintiff for the
sum of P50,000 plus interest, attorney's fees, and costs. It is from this judgment that the defendant has
appealed, assigning six errors which, it is alleged, were committed by the trial court. Our decision
should now conclude the judicial warfare.
STATEMENT OF THE FACTS
          On April 26, 1920, the Laguna Coconut Oil Co. executed in favor of the Philippine Vegetable Oil
Company, Inc., the following promissory note:
LAGUNA COCONUT OIL CO.
Vegetable Oil Manufacturers
 Manila, P. I.

P50,000

          One month after date, we promise to pay to the Philippine Vegetable

Company, Inc., or order at the City of Manila, Philippine Island, the sum of fifty
thousand pesos (P50,000) Philippine currency; value received.

          In case of non-payment of this note at maturity, we agree to pay interest at the

rate of nine per cent (9%) per annum on the said amount and the further sum of
P5,000 in full, without any deduction as and for costs, expenses and attorney's fees
for collection whether actually incurred or not.

          Manila, Philippine Islands, April 26, 1920.

LAGUNA COCONUT OIL CO.          

BY (Sgd.) BALDOMERO COSME President          

On May 3, 1920, the Fidelity and Surety Company of the Philippine Islands made a
notation on the note reading as follows:

MANILA,           May 3, 1920          

          For value, received, we hereby obligate ourselves to hold the Laguna Coconut Oil
Co. harmless against loss for having discounted the foregoing note at the value stated
therein.

FIDELITY AND SURETY CO. OF THE PHILIPPINE ISLANDS

By (Sgd.) J. ELMER DELANEY          

Vice-President          
Cedula F-3443, Jan. 2,1920, Manila, P.I.          

Attest:

(Sdg.) A.D. TANNER          

Secretary-Treasurer          
Cedula F-3447, Jan. 2, 1920, Manila, P. I.          

          On May 4, 1920, the Philippine Vegetable Oil Company endorsed the note in blank and delivered
it to the Bank of the Philippine Islands. It is possible that the Philippine Vegetable Oil Company was
paid the sum of P50,000 therefor. At least after maturity of the note, demand for its payment was made
on the Laguna Coconut Oil Co., the Philippine Vegetable Oil Company, and the Fidelity and Surety
Company of the Philippine Islands, all of whom refused to pay, the Laguna Coconut Oil Co. being
admittedly insolvent. The correspondence of the bank with the Fidelity and Surety Company is in the
record, and is emphasized by the plaintiff as indicative of responsibility assumed by the defendant, but
is objected to by the defendant as for minor importance.
          The effort of the plaintiff on its last appearance in the trial court was to connect up the
promissory note of P50,000 with an existing obligation of the Philippine Vegetable Oil Company in the
form of another promissory note. The evidence was also intended to demonstrate that a clear error had
been committed when reference was made to the Laguna Coconut Oil Co. in the notation on the note.
The plaintiff's theory was confirmed by the trial judge. His Honor emphasized that the note could not
have been discounted by the Laguna Coconut Oil Co., and that this must logically have been done by
the Bank of the Philippine Islands. Without paying particular attention to certain of the assignment of
errors, let us ascertain if this position is tenable and if the plaintiff has made out its case.
OPINION
          According to section 285 of the Code of Civil Procedure, a written agreement is presumed to
contain all the terms of the agreement. The Civil Code has articles to the same effect. However, the
Code of Civil Procedure permits evidence of the terms of the agreement other than the contents of the
writing in the following case: Where a mistake or imperfection of the writing, or its failure to express
the true intent and agreement of the parties, is put in issue by the pleadings. This provision of our local
law was construed by the United States Supreme Court in the well-known case of the Philippine Sugar
Estates Development Company vs. Government of the Philippine Islands ([1917], 247 U. S.385). It was
there announced that the courts of equity will reform a written contract where, owing to mutual
mistake, the language used therein did not fully or accurately express the agreement and intent of the
parties. It was also stated that the relief by way of reformation will not be granted unless the proof of
mutual mistake be "of the clearest and most satisfactory character." The court finally said that the
evidence introduced by the appellant met these stringent requirements.
          Our local decisions have applied the rule that the amount of evidence necessary to sustain a
prayer for relief where it is sought to impugn a fact in a document is always more than a mere
preponderance of the evidence. (Centenera vs. Garcia Palicio [1915], 29 Phil., 470; Mendozana vs.
Philippine Sugar Estates Development Co. and De Garay [1921], 41 Phil., 475.) Has the plaintiff
carried the burden of proof in this manner and to this extent? That is the question.
          In reaching out to consider the possibilities of the case, we are first confronted with the language
of the court when the case was last here. Mr. Justice Ostrand, in the course of the opinion in that
instance, observed: "The writing upon which the action is brought does not in terms show any
obligation in favor of the plaintiff and the action can only be maintained upon the theory that the
writing does not express the true intent of the parties. We may surmise that the guarantee in question
was intended for the benefit of the party who subsequently discounted the note, but we cannot be
certain." It was then pointed out that the note may have been merely an accommodation note, and that
the guaranty may have been intended for the protection of the maker. However, the parties have not
seen fit to take advantage of this suggestion.
          An examination of the note and the guaranty discloses that in the notation to the note the word
"hold" is interlined. This indicates that the Vice-President of the Fidelity and Surety Company had his
particular attention called to the language of the note, and corrected the typewritten matter by inserting
in ink the word quoted. That the writer of the notation fell into a further error in obligating the company
to the Laguna Coconut Oil Co. may be possible. That the writer may have had in mind to use the words
Philippine Vegetable Oil Company, Inc. may also be possible. The names of the two parties before the
guarantor were Laguna Coconut Oil Co. and Philippine Vegetable Oil Company, Inc. The guaranteeing
company could mot very well have assumed that the Bank of the Philippine Islands at a later date was
contemplating discounting the note.
          It is also apparent on the face of the note that it was to draw interest at maturity. This fact would
disprove discount of the note by the Bank of the Philippine Islands on or before May 3, 1920. In truth,
it is not certain that the bank ever did discount the note. At least, plaintiff in its second amended
complaint averred that the promissory note "was discounted by Philippine Vegetable Oil Company,
Inc."
          The bookkeeping entries of the bank are hardly competent against a stranger to the transaction,
such as the defendant in this case. Moreover, it will not escape notice that one entry at least in plaintiff's
Exhibit E has been changed by erasing the words "y Fidelity and Surety Co. of the Phil. Islands" and
substituting "Philippine Vegetable Oil Co. garatizado p. Fidelity & Surety Co. of the Phil. Islands." The
book entries taken at their face value are not conclusive.
          The correspondence between the parties fails to disclose either an express or implied admission
that the defendant had executed the guaranty in question in favor of the plaintiff bank. There is nothing
in these exhibits from which any such admission can be inferred. An attempt to interpret the
correspondence merely leads open further into the field of speculation. Yet the rule is that an admission
or declaration to be competent must have been expressed in definite, certain, and unequivocal
language. (1 R. C. L., 481.) Here the exhibits are couched in language which is neither definite, certain,
nor unequivocal for nowhere do they contain an admission of a guaranty made by the defendant
company for the protection of the Bank of the Philippine Islands. 1awph!l.net
          To justify the reformation of a written instrument upon the ground of mistake, the concurrence of
three things are necessary: First, that the mistake should be of a fact; second, that the mistake should be
proved by clear and convincing evidence; and, third, that the mistake should be common to both parties
to the instrument. The rule is, as has been above stated, that the mistake must be mutual. There may
have been a mistake here. It would, however, seem to be straining the natural course of events to hold
the Fidelity and Surety Company of the Philippine Islands a party to that mistake.
          It may be that the majority has not approached a decision in this case in a spirit of tolerant
sympathy. The plaintiff has filed three distinct and conflicting complaints. It has not remained loyal to
any one theory of the case. For instance, it has alleged at various times that the guaranty of the
defendant was in favor of the Laguna Coconut Oil Co., and that the guaranty was in favor of the Bank
of the Philippine Islands; that the note was discounted by the Philippine Vegetable Oil Company and
that the note was discounted by the Bank of the Philippine Islands; that there was no mutual mistake
and that there was mutual mistake. The court was thus justified in its statement when the case was here
before when it said: In view of the fact that the case has been pending for several years, that it has been
before this court once before, and that the plaintiff has had ample opportunity to remedy the defect in
its pleadings, we would be warranted in definitely absolving the appellant from the complaint, but the
majority of the court is of the opinion that the plaintiff should be given another opportunity to
prosecute its claim."
          With all the various pleadings, all the various incidents, all the various facts, all the various legal
principles, and all the various possibilities to the forefront, we cannot bring ourselves to conclude that
the plaintiff, by proof of the clearest and most satisfactory character constituting more than a
preponderance of the evidence, has established a mutual mistake. Instead, the proof is left far behind
that goal.
          In accordance with the foregoing, the judgment appealed from will be reversed, and the
proceedings definitely dismissed, without special pronouncement as to costs in either instance. This
order will also serve to deny the two motions of reconsideration filed by the appellee.
Johnson, Ostrand, Johns and Villa-Real, JJ., concur.
 
 
 
Separate Opinions
 
AVANCEÑA, C.J., STREET, VILLAMOR and ROMUALDEZ, JJ., dissenting:
          In the opinion of the undersigned this is a clear case for reformation of an instrument and
enforcement of the same as reformed. The contract which is the subject of the action is found in the
indorsement of the defendant Fidelity and Surety Company appended to a note for P50,000, signed by
the Laguna Coconut Oil Co., and payable to the Philippine Vegetable Oil Co., Inc. The indorsement
referred to reads as follows:
MANILA, May 3, 1920          
          For value received, we hereby obligated ourselves to hold the Laguna Coconut Oil Co. harmless
against loss for having discounted the foregoing note at the value stated therein.
FIDELITY AND SURETY CO. OF THE P.I.                    
BY J. ELMER DELANEY"                    
          This contract has already been the subject of a former action by the same plaintiff against the
same defendant and the Coconut Oil Co.; but in that case reformation of the contract was not sought
and this court held that, as the contract did not purport to bind the defendant Surety Company to the
Bank of the Philippine Islands no recovery could be had thereon by the bank. But at the same time the
decision was made without prejudice to another action, the idea evidently being that an action could be
maintained for the reformation and enforcement of the instrument.
          The parties concerned are now before us in an action seeking in effect reformation and
enforcement of the contract as reformed, though in the petitory part of the complaint it is not put
exactly in that way. Under the facts proved and prayer for general relief, a right to obtain reformation
and enforcement of the reformed contract is evident.
          An examination of the indorsement, or contract, which is the subject of the action shows that the
Fidelity and Surety Company acknowledges that it has received value for placing its signature on said
indorsement, thereby nominally obligating itself to hold that Laguna Coconut Oil Co. (sic?) harmless
against loss for having discounted the note. Although the mistake is not obvious to the superficial
reader, the words used make an impossible situation and completely frustrate the manifest intention of
the parties. It is proved as a fact that the Laguna Coconut Oil Co. was debtor to the Philippine
Vegetable Oil Co. and that the note to which the indorsement of guaranty is appended was given for
that indebtedness. That an error was made in the wording of the indorsement is obvious and
undeniable. The intention of the contracting parties could only have been that the Fidelity and Surety
Company should hold harmless the person or entity discounting the note. The plaintiff did in fact
discount said note on the faith of this indorsement, and the instrument should be reformed so as to give
expression to the liability of the defendant company to the bank.
          In dealing with this situation, it should not be forgotten that the defendant company evidently
intended to obligate itself to someone or other, and the attitude of the court should be favorable to the
giving of effect to the intention of the parties rather than favorable to its frustration. By the decision of
the court in this case, the Fidelity and Surety Company is entirely free from the obligation of guaranty
in respect to this note, although it received value for that very undertaking. We therefore dissent.